One of the most amazing aspects of this economic recovery has been the resiliency of the American consumer. Given a banking/housing/credit crisis that nearly melted down the economy, you would have thought that high-end luxury retailers like Tiffany & Co. (TIF) and Coach (COH) and upper-tier department stores like Nordstrom (JWN) and Macy’s (M) would have suffered the most.

To the contrary, these were terrific investments as their earnings continued to surprise quarter after quarter. The consumer was not hunkering down in Wal-Mart (WMT) or Kohl’s (KSS). She was out shopping like nobody’s business. More on that surprising trend of the past two years in a moment.

Now Comes the Recession?

Well, the high-end may still do well, but it finally happened. Fears of a double-dip drove both shoppers and investment money to the low end of the consumer food chain in the past few months.

Dollar General (DG) broke out to new highs in August when the rest of the market was melting down. It was joined in its rally by the other “buck machines” Dollar Tree (DLTR) and Family Dollar (FDO), and this is really not surprising when the “R” word was on every investors mind and tongue.

DG had a very interesting day worth noting on the chart back on September 9 when over 20 million shares traded — nearly 10 times the average — as the stock pulled back below $35.

Clearly, some recession-conscious investor dug deep and it paid off as shares have only climbed in the past month to eclipse $39. DG is a Zacks #1 Rank (strong buy) stock, while DLTR and FDO are #2s (buy).

As an industry group, the Discount Retailers currently hold the #42 spot among 265 other industries in the Zacks classification universe for their collective earnings momentum. The group also includes names like Target (TGT), Costco (COST), and the TJX Companies (TJX).

Ross Stores (ROST), a discounter along the lines of the three most popular TJX stores — T.J. Maxx, Marshalls, and HomeGoods — all under one roof, is another interesting idea here. ROST, a #1 Rank stock, has recently made a price break out above $82.50 and looks poised to go higher.

With other names in the group like warehouse club PriceSmart (PSMT) in terrific up-trends, the Discount Retailers are sure to continue offering trading opportunities as economic uncertainty and credit contraction make their stores more popular.

An Economic Indicator?

Is the move into these names a leading indicator of leaner times? While this is possible, I think this was more of investment shift that was overdue. And while it may become overdone in some of the names, sticking with the ones that execute the best shouldn’t be too hard if we focus on their earnings momentum and performance.

The earnings table above is for Dollar General and it is fairly representative of the group, with Dollar Tree nearly matching the current year/next year growth at 23.4% and 16%, and Family Dollar projected to grow at 16.6% and 15.3% for this year and next.

In terms of forward P/E multiples, FDO is the cheapest at 15, DLTR the most expensive at 20, and DG holding up the middle at 17.

Luxury Predator on the Mag Mile

I said I’d come back to theme of why the high-end and the low-end of the consumer food chain could both thrive.

I wrote about this in July and provided some interesting “research” about how the high-end could thrive with 9% unemployment and credit card offers drying up. And this wasn’t just about “the rich could afford to shop.” Here’s what I shared in Consumer is Alive and Kicking…

I did a little anecdotal research to find out why the stocks of luxury retailers like Coach and Tiffany should have done so much better than those of Walmart or Target when it seemed to me in 2009-10 that the easy “pairs trade” was to short Fifth Avenue and buy Main Street, based on a retrenching consumer.

My expert in the field — a 30-something female shopaholic who stalks Michigan Avenue and the Chicago suburban malls like a ruthless predator of the finer things — told me that Coach and Tiffany did something unprecedented in the past couple of years. They “brought down the shelves” to Main Street, she said, by offering new luxury products at lower price points.

This meant she could buy a $400 Coach bag and feel just as classy as the woman with the much more expensive Louis Vuitton bag. And Tiffany made life easier for your average husband or boyfriend by creating signature bracelets under $200.

Dollars and Diamonds

So the semi-hedged “pairs trade” here may continue to be buying both ends of the consumer food chain. TIF and COH both are still projecting high-teens growth and both are #2 Rank stocks.